At 7am on 13 March 2023 Silicon Valley Bank UK Limited (SVB UK), the UK subsidiary of the US bank, was sold to HSBC UK Bank Plc (HSBC) for £1.

This marked one of the first bank resolutions under the Banking Act 2009.1

The Banking Act 2009 provides for a range of powers and tools to "resolve" a bank with the objective of (among other things) ensuring continuity of banking services in the UK, protecting the stability of the UK financial system, protecting public confidence in the UK financial system, protecting public funds and protecting investors and depositors covered by the Financial Services Compensation Scheme (FSCS).

The use of these resolution powers was exercised under the Silicon Valley Bank UK Limited Mandatory Reduction and Share Transfer Instrument which came into force at 7am on 13 March 2023. We set out in this post a high-level overview of the powers exercised and what they mean.

LEGAL POWERS

Powers under the Banking Act 2009 exercised What does the power allow UK authorities to do? What does this mean for SVB UK and others in the market?

WRITE-DOWN OF CAPITAL INSTRUMENTS
Section 6A(2) and 6B Provides the Bank of England with write-down (including to zero) and conversion powers of a bank's capital instruments and liabilities. The principal amount of:
  • £322 million perpetual subordinated notes issued by SBV UK (the Additional Tier 1 instruments); and
  • £33 million subordinated debt notes due 2032 issued by SBV UK (the Tier 2 Instruments),

were reduced to zero and any liabilities owed by SVB UK in respect of these instruments were cancelled.

Shares in SVB UK effectively written-down to £1 in value.

TRIGGERING RESOLUTION
Section 7 General conditions to trigger resolution (waterfall assessment)
  1. Failing or likely to fail
  2. No alternative private solution
  3. Resolution is necessary on public interest grounds
  4. Resolution objectives would not be equally met in insolvency
 The PRA was satisfied (in consultation with the Bank of England) that condition 1 was met for SVB UK.

The Bank of England was satisfied (in consultation with PRA, the FCA and the Treasury, as appropriate) that all other conditions were met for SVB UK.

TRANSFER TO A PRIVATE SECTOR PURCHASER
Section 11(2) The Bank of England has the power to sell all or part of the business of a bank to a commercial purchaser by way either of a share or an asset deal. All SVB UK shares in issue were transferred to HSBC.
Section 15 When opting for a share deal, the Bank of England needs to issue the share transfer instrument specifying the securities and other terms of the transfer. All shares in SVB UK were specified.
Section 17 A share transfer takes effect by virtue of the share transfer instrument, notwithstanding any restrictions in contract or legislation. All liabilities, claims and encumbrances on the SVB UK shares were extinguished and the transfer was regardless of any statutory or contractual restrictions on the transfer or holding of the shares.
Section 18 The share transfer instrument may set out provisions to ensure continuity between the bank in resolution and the purchaser. This includes, among others, requiring the each of the two parties to provide the necessary information and assistance to ensure continuity. HSBC is to be treated as the same person as the Silicon Valley Bank (the US Bank, the transferor) for all purposes necessary to give effect to the transfer to HSBC.
Section 20 Power to remove/vary the terms of/terminate/appoint the management of the bank in resolution. The directors of SVB UK are required to do all things necessary to give effect to the use of resolution powers.
Section 21 Ancillary powers aiming to ensure that the share transfer instrument will take effect as soon as possible (registration requirements, etc).
Section 23 A share transfer instrument or order may include incidental, consequential or transitional provision. Silicon Valley Bank (the US Bank, the transferor) must provide HSBC and the Bank of England with such information and assistance as is reasonably requested for any purposes in connection with the mandatory reduction of capital instruments or share transfer to HSBC.

BAIL-IN
Section 48L Provides powers to cancel or modify securities and convert securities from one class to another. Powers may have been used to alter share class. We assume shares in SVB UK effectively written-down to £1 in value under the earlier mandatory write-down.
Section 48N Power to remove/vary the terms of/terminate/appoint the management of the bank in resolution. The directors of SVB UK are required to do all things necessary to give effect to the use of resolution powers.
Section 48O Obligation of management to comply with the Bank of England's instructions.
Section 48Q Power to provide as necessary to ensure the continuity of services, legal proceedings, etc.
Section 48S Provisions to take effect despite any restriction arising by virtue of contract or legislation or in any other way.

OPERATIONAL CONTINUITY
Section 66 Obligation on former group companies to continue to provide critical services subject to a right to receive reasonable consideration. SVB UK former group companies are required to continue to provide critical services to SVB UK.

SAFEGUARDS
Section 50(2) The Treasury shall make a compensation scheme order. Treasury order is yet to be seen.


Footnote

1. Previous resolutions under the Banking Act 2009 include Dunfermline Building Society in March 2009 and Southsea Mortgage and Investment Company Limited was placed into modified insolvency on 16 June 2011. See https://www.bankofengland.co.uk/financial-stability/resolution for more detail.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.